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Saturday, 28 January 2017

Low tax rates mean higher collections (Sunday Guardian)

By M D Nalapat

Tax slabs should begin at Rs 6 lakh a year; income up to Rs 50 lakh should have 10% tax.

The
8 November 2016 demonetisation of 86% of India’s currency is a measure
not duplicated before on the same scale in any democratic state. This
has given rise to expectations that the 2016-17 Union Budget will be
similarly path-breaking, in that it will slash tax rates and simplify
regulations so that hundreds of crores of rupees of the monthly takings
of lawyers and chartered accountants remain in the pockets of other
taxpayers. What needs to be considered is the fact that demonetisation
was strongly supported by key elements of the bureaucracy, including the
Reserve Bank of India, the Ministry of Finance and agencies tasked with
battling terrorism. Given that our official machinery is the
natural-born successor to the British raj, and indeed has the same DNA
as its parent, the demonetisation was almost unanimously backed because
of its ripping away the veil of secrecy from financial transactions.
Whether an individual bought alcohol or indulged himself in other ways,
payment by card meant not only a tithe to the exchequer (and to the
companies owning such alternatives to cash) but transparency in what
each citizen was doing. Of course, our bureaucracy resists revealing the
inner processes of its own working, something unexplainable if the
assumption be made that all executive actions are driven by public
interest. Even Prime Minister Narendra Modi seems to be finding it a
steep uphill climb to actualise his 2014 promise of transparency, with
even the Subhas Bose papers remaining largely hidden together with such
relics as the Henderson-Brooks report. The Right to Information
committees remain the preserve of those with a record of thirty years
and more of denying information to any individual outside the
bureaucracy and its relatively few political overlords, while even the
courts often trust the bureaucracy’s word that enhanced transparency
would—horror of horrors—only work to fulfil the objectives of the ISI
and other foes of India. In fact, the more transparency there is, the
cleaner and more efficiently will government function, thereby leading
to the double digit growth that is essential if India is to avoid the
fate of Pakistan in the coming years.

For the British, all that mattered was to squeeze out
revenue from the people of India so as to feed the gargantuan colonial
machine. That approach does not seem to have changed over the past seven
decades. Almost all budgets have been almost wholly designed to meet
the expanding costs of governance during the year in question, rather
than to boost growth so that future tax revenues would go up. An example
of such regression is that Chidambaram innovation, the Service Tax,
which has ensured that a once fast-growing sector has since slowed down
considerably. Had this tax been abolished or sharply reduced, the
services sector would by now have expanded its employment and income
creating capacities sufficient to more than compensate (through indirect
and other taxes) for the revenue loss experienced in abolishing or
sharply reducing the Service Tax. Instead, this impost has steadily been
increased, and looks to be in the future as well, thereby slowing down
job creation further in an economy already burdened by high imposts and
vexatious regulation. It does not seem to bother North Block that, for
example, the reason why companies with substantial businesses in India
declare more profits (and therefore pay more taxes) in foreign countries
rather than in India (through juggling of accounts) is because each
rupee of declared profit gets taxed much higher in this country than in
most other corners of the globe.

Hopefully, the boldness shown by Narendra Modi in the
demonetisation exercise will get repeated in the next Union Budget. Tax
slabs should begin only at Rs 6 lakh a year, and there should be just a
10% tax on income up to Rs 50 lakh annually, rising to a 20% rate on
income up to Rs 5 crore a year, and 30% on income above that figure. In
order to ensure that wealth does not remain skewed in coming years, an
inheritance tax of 10% should be levied up to for any inheritance above
Rs 10crore, with this rising to 20% from Rs 10 crore to Rs 25 crore, and
30% for all assets above that value. As for Wealth Tax, this should be
levied only on wealth above Rs 10 crore and should be in the form of
contributions to listed NGOs active in societal uplift. In other words,
Wealth Tax should fall on the truly well-off to institute a scheme of
Individual Social Responsibility (ISR) on the lines of CSR. A moderate
overall tax regime that promotes both a social conscience as well as
greater equality over time would ensure a far better climate for growth
than the convoluted and high tax regime that the country has been
witness to for much too long.

Populists who indulge in Maoist rhetoric directed against
the rich need to understand that most of the rich as well as the bulk of
the poor are the consequence of a colonial governance system that
rewards dishonesty and penalises the honest. Those carrying out a
populist campaign against the wealthy will only ensure such a dampening
of the investment climate that the annual growth rate will return to the
3% level that was the norm during the Fabian Socialist decades of
“Amiron ko Hatao”. All that such measures did was to reduce growth and
increase the number of those remaining in poverty. Rather, what is
needed is to ensure a post-colonial governance system, where the
deserving of any income group are given the educational and other tools
needed to grow the country by growing themselves in a facilitatory
environment. The millions of citizens who have backed Narendra Modi long
before he took charge on 26 May 2014 expect the PM to ensure that the
low taxes, low regulation and high transparency inherent in his historic
call for “Minimum Government” become a reality at least before the next
Lok Sabha elections, if not in 2017 itself.

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About Prof. M. D. Nalapat

Prof. Madhav Das Nalapat (aka MD Nalapat or Monu Nalapat), holds the UNESCO Peace Chair and is Director of the Department of Geopolitics at Manipal Academy of Higher Education, India. The former Coordinating Editor of the Times of India, he writes extensively on security, policy and international affairs. Prof. Nalapat has no formal role in government, although he is said to influence policy at the highest levels. @MD_Nalapat

MD Nalapat's anthology 'Indutva' (1999)

In 1999, Har-Anand published Indutva an anthology of MD Nalapat's 1990s columns from the Times of India. The individual columns are posted here, in 1998 and 1999 of the blog archive, though the exact dates of publication are uncertain.